A Piece of the Action

Kirk: Now, look, Krako, we’re takin’ over the whole ball of wax. You cooperate with us, and maybe we’ll cut you in for a piece of the action. Spock: A miniscule… a very small piece. __________

Apple’s business model has changed. It has gone from being a Mac hardware and boutique UNIX company to an ecommerce giant, taxing everything that passes through its portals. How will this affect Apple and its executives and what future is in store for the company?

Often, when a company grows, it does so by spreading out into new businesses. Good examples are Amazon.com and Google.com. Amazon started selling books in 1995. Today, if you want, you can buy clothing, tools, shoes and even cashews from Amazon. As a company expands into the market, driven by its success and brand, it steps on other company’s toes by necessity.

Star Trek: TOS “A Piece of the Action” (Credit: Paramount)

The ability to create enemies out of thin air is the forte of any growing company.

A by-product of working on many fronts is that the founders’ emphasis on hard work can take second place to expedient business decisions under pressure. The emphasis can become shrewd and aggressive decisions instead of just working harder, a trait often seen on Wall Street. Case in point: Apple’s iBookstore only has about 60,000 titles (and that includes project Gutenberg) while Amazon’s bookstore has over 450,000 titles. The reason is explained by a former Amazon engineer: Amazon is willing to do the hard work of conversions to digital format. Meanwhile, Apple via its App store policies can just create money with no effort at all, as witnessed by the recent Sony Reader kerfuffle. Shrewd is the word.

The rate at which Apple is making enemies takes one’s breath away.

Enemies lurk everywhere - it wears one down

What Ifs

To drive the point home, what if Steve Jobs took a dislike to Mister Peanut and started to offer Apple’s own line of salted cashews? Then Apple’s new enemy would be The Planters Peanut Corp. And Amazon because they sell cashews too.

There are rumors that Apple might start selling HDTVs with iOS inside, a true “Apple TV.” Then Apple’s newest enemies would be, to name a few, Samsung, Sharp and Panasonic. While Apple buys billions of dollars with or displays and Flash memory from Samsung, it already competes with Samsung on tablets.

With these hypothetical examples, I hope you see my drift.

The Inevitable Result

How much larger can Apple’s enemies list grow? How does a company with so many enemies stay focused on new products and avoid becoming paranoid? When will the need to undermine opponents at every turn create a company mired in paranoia and bitterness, especially if Steve Jobs is no longer around to enforce focus?

I am reminded of a cool Cold War story I heard. I don’t know if it’s true or not, but it makes my point. You must recall that that each of the three major branches of the U.S. military is always fighting for its share of funding, and each believes it can best protect America.

USAF F-16

An Air Force three star General is walking down the corridor of the Pentagon and chatting with his aide, an Air Force Captain. These were the cold war days, so the Captain made a casual remark about how the United States needed to take a harder line with its enemy, the Soviet Union. Quickly, the General stopped, swiveled, and pinned the young Captain against the wall, snarling. “You’ve got it all wrong, son! Listen carefully. The Soviet Union is our opponent! The U.S. Navy is our enemy.”

In 2005, Apple had one enemy: Microsoft. And that war was lost in terms of numbers, so Apple continued its mantra of being the best. After all, branding school says that there are only four basic brands: the first, the biggest, the best, or different in a special, appealing way. Apple focused on great hardware and attending to the hard work details like: Active Directory plug-in, MS Office compatibility, POSIX compliance, a great X-Windows experience, and so on.

Now, with Apple’s expansion, who can claim that the iBookstore is the best or biggest ebookstore? Or that The Daily, which Apple has a stake in, is the best newspaper? Or that Ping is the best social network? Or that MobileMe is the best cloud service? Dilution of brand is always a problem for growing companies.

Apple Competes with its Customers

By taking a piece of the action, a cut, via the iTunes, App Store and now MAS, Apple competes with everything we do. That very act interferes with the creative mind that Apple fought so hard to engender amongst us.

If, being an Apple creative type, I come up with a great idea for a news delivery system, Apple has the option of either tax my profits out of existence or undermine it by energetic support for something it has a stake in, say, The Daily.

If I come up with a great idea for a music social network, Apple will counter it with, say, Ping.

If I come up with a competing way to sell music, Apple will consider that a threat, (like Spotify) not a blessed creative venture using Apple products.

Of course, Apple doesn’t mind at all if millions of developers sell 99 cent apps, even some silly ones, and make decent money. A healthy ecosystem is, after all, fundamental to a getting a pice of all the action.

This is why Google tried to buy both Groupon and Twitter. They threatened the agenda of Google, so absorb them, morph them, exploit them. The founders of those companies, realizing their future potential and wealth, wisely backed out — and will likely become the next generation’s Bill Gates and Steve Jobs

The Brilliance of the Past & Unexpected Future

Microsoft’s brilliance, and the way it got them rich, was by imposing a Windows “tax” on almost every PC sold on the planet.

Cough it up!

Apple’s brilliance, and the way it got them rich, was by building spectacular, desirable hardware, then imposing a tax on almost every app (and book and newspaper and song). And now they appear poised to tax every purchase we make with NFC technology and digital wallets. Apple was beleaguered for so long, we’re still occupied reveling in their success. But that’s okay only for a little while longer. Time to move on.

Modern companies like Facebook, Groupon and Twitter will do everything they can to avoid giving Apple a piece of their action. That desire, that business instinct virtually guarantees that Apple will miss the Next Big Thing, created by the unexpected companies of the future that bypass Apple, as Apple is bypassing Microsoft, and become the new, dreaded enemy. But life will go on.

While the point is well taken that Apple, to ensure its future success, must stay focused on making insanely great products and services and that those services should be in field of Apple’s core competencies or essential or at least realted to those competencies, Apple charging 30% for items sold on its iTunes stores and requiring that goods and services marketed on its store be also sold, but not exclusively sold, through in-app purchases on its App Store and at the best online price available anywhere, so that Apple gets value for a vendor’s marketing of its wares on the App Store is not only fair, is not only Apple charging for the value of marketing on its highly successful App Store, it is nothing more than Apple charging an explicit 30% retail mark-up.

The complaints of Sony, Amazon, and others are hypocrisy and disingenuousness in the extreme, because all of them charge a similar implicit retail mark-up that is hidden in the sale price of the goods and services that they offer in their online stores.

So I don’t think that Apple insisting on non-exclusive in-app sales at the best available online price for the valuable use of its App Store to market goods is unfair or shows any loss of focus, unless focus requires that Apple be patsy. It merely represent Apple getting a fair opportunity to compete for its 30% commission for any goods and/or services that are marketed on its App Store.

Nemo. i agree. No one is bitching that Apple’s iBooks is unavailable on the Kindle. And the iPad shouldn’t be a free ride for companies that can’t seem to market and sell their own ebook hardware reader. You pay Apple’s tax or go somewhere else. Isn’t that called a racket?

Facebook makes a bundle of money and all you need is a browser. Apple gets nothing. Ah, sweet free enterprise.

Well, John, when Target and Walmart do, both of which often also demand that they get the best wholesale deal offered anywhere else, it is called a retail mark-up to reflect their respective costs and a profit, not a tax and not a racket.

And yes, one of the reason that I think Apple’s new regulation requiring non-exclusive in App Sales, if you market on the App Store, will survive any antitrust scrutiny is that there are viable competitive alternatives in Amazon, Google’s Android Market Place, etc.

And the reason that I think that Apple’s new regulation won’t hinder it winning developers to its App Store is that Apple offer an excellent vlaue for its 30% commission in its App Store.

So what you’re saying Bryan is that any company should be barred from growth and becoming successful. Otherwise, the result would be their transformation from a little fish in the ocean to a whale in a pond. Is that what your saying?

Apple’s success was not built on the shoulders of working with other companies like Sony, Microsoft, etc. On the contrary, given the opportunity they would have been even more ruthless in trying to put Apple out of business.

Apple became successful because the consumer - meaning regular folks like you and me - saw intrinsic value in the products and services that Apple provided. The other players that have for decades tried unsuccessfully to shove lousy products into the market are suddenly now crying fowl. Such a cruel mistress that revenge can be.

I also agree with Nemo. The other players have even worse policies that Apple and do what they can to hide their schemes. They are hypocrites in every way.

sflocal: In the history of American business no company has had enormous growth and become rich beyond dreams, dominate and remained unscathed. Think of my column as food for thought, a Dickens Christmas Carol with some warnings and hope for a happy ending.

3GSnow4:20 PM EST, Feb. 3rd, 2011Guest

You don’t really think Facebook, Groupon and Twitter trying to avoid giving away any piece of their action applies only to Apple, do you? I’m sure you know that applies to you and me, as well, and any other entity even just remotely within the same sphere of business. Much like Apple.

As far as the “30% retail mark up” (or tax, as you call it), try selling any itty-bitty application online as an independent. Once you get your paid for website noticed in the wide world of the web through some costly advertising campaign, you will then face a choice of accepting payments through Visa/Mastercard or Paypal. No, they don’t quite charge 30%, it just feels like it. And it gets better, with something called “chargebacks”, through the shenanigans of buyers who will be keeping the software product but want their money back.

Apple rarely (if ever) allows refunds from the App Store and those “in the know”, know why. If I wrote apps (which I currently don’t), I’d gladly jump on that 30% “tax” wagon before you can say “Sold”.

I’ve read your piece twice and still can’t get what you’re advocating here. Perhaps it’s merely a cautionary tale. But you need to be careful you don’t instead fan the flame of some misguided and misinformed backlash that could truly cripple Apple’s creativity.

Apple rarely (if ever) allows refunds from the App Store and those ?in the know?, know why. If I wrote apps (which I currently don?t), I?d gladly jump on that 30% ?tax? wagon before you can say ?Sold?.

Right. Reasonable people and developers can differ on what they like or don’t about sales channels. If you had a catalog approaching 1 million ebooks, a popular hardware product to deliver them, and fantastic success as a first big mover, tens of millions in revenue, that 42.8% Apple tax on your licensed content might be harder to swallow.

If you had a catalog approaching 1 million ebooks, a popular hardware product to deliver them, and fantastic success as a first big mover, tens of millions in revenue, that 42.8% Apple tax on your licensed content might be harder to swallow.

Surely, if your product has the capability to move tens of millions in revenue, you don’t really have to go the Apple route? There are numerous ways to sell ebooks and software outside that system. (Where did that 42.8% figure come from, by the way?)

But as a concrete example, Pixelmator grossed $1 million through the Mac App Store a mere 6 days after it opened. The way the Pixelmator people are talking on their website, I don’t think they’re seething with anger that Apple is taking a $300K cut. Now, suppose they actually sell 1 million Pixelmator units by the end of the year for a cool $30 million, do you think they’ll be stomping their feet because of Apple’s $9 million cut?

Well, let me see. If I were that developer I’d be sipping margaritas on an island somewhere, allowing the App Store to do all the hard work promoting, selling, accounting and putting my millions in the bank. I’ll be sure to thank Apple profusely when it takes its cut.

At one point in your article you mention “the three major branches of the U.S. military”. Last time I checked there were five military branches in the U.S. (Army, Navy, Air Force, Marines, and Coast Guard). Which three do you consider to be major and why? Just wondering.

I guess you missed the Sony Reader kerfuffle, as John linked to in his article. It’s the context that makes this article topical.

If you are paying Apple $0.30 for every dollar in sales, and you keep $0.70, you can think of Apple as imposing a 42.8% ($.30/$.70) tax atop your earnings. If you are a podunk developer without a developed sales channel, that’s not the worst deal. It’s the same as Google offers, except that on Android, you’re not locked into the Marketplace. However, if you are Sony and you already have in-app purchasing capability or web based purchasing linked from your app, perhaps it would annoy you to pay a 42.8% tax on content to Apple on millions in sales simply because it makes it a condition of distributing your product on the iOS platform. There is no side-loading, no alternative stores on iOS.

What Apple is doing here is switching after laying the bait. Had these policies been in place and enforced at the beginning of the iPad, costs of doing business on the platform would have been known to the likes of Sony, Amazon, etc. Now, they are in a corner, being told to pay up or get off. While the policy itself is objectionable, the process by which it was put in place is repugnant. Ideally, a company like Amazon finds a creative way to stand up to Apple. In reality, Apple is the biggest thug on the street right now. Apple’s customers will lose via higher prices. The 30% that Apple will be taking has to come from somewhere.

Oh, and in case you missed it, they banned competing in-app purchase schemes and are going to require developers to offer’s Apple’s in-app purchases if they link to out-of-app purchase options in the app. It is amazing to see anyone offer an earnest defense of that routine.

rjackb: The relationship between the Navy and Marines is complicated, and while they are separate organizations, they work closely together. The Coast Guard is wonderful organization, just not one of the Big Three.

John, if Sony’s price point on an ebook is $7 and that accounts for licensing, delivery, call it 3% for credit card billing, and the margin they expect for the sale, Apple will need to charge $10 to get its 30% cut and Sony still be able to deliver that good. That is a 42.8% price increase. However you want to frame the competitive environment that spills out of this, that’s about what iOS user will pay more than through other venues for non-Apple content.

Put it in iCal to check into this 6 months from now and see if Econ 101 plays out. It will if Apple goes down this course. They’ll justify it as “security” or other FUD, make Amazon and Sony the enemies of all that is good about iPad, etc. But the extra cost will be there.

Peter11:02 PM EST, Feb. 4th, 2011Guest

While the point is well taken that Apple, to ensure its future success, must stay focused on making insanely great products and services and that those services should be in field of Apple?s core competencies or essential or at least realted to those competencies, Apple charging 30% for items sold on its iTunes stores and requiring that goods and services marketed on its store be also sold, but not exclusively sold, through in-app purchases on its App Store and at the best online price available anywhere, so that Apple gets value for a vendor?s marketing of its wares on the App Store is not only fair, is not only Apple charging for the value of marketing on its highly successful App Store, it is nothing more than Apple charging an explicit 30% retail mark-up.

I think we need to teach you about run on sentences. That whole thing above? One sentence. The fact that you have to obfuscate the whole thing makes me doubt you.

Take Amazon. Amazon has books for sale—450,000 or so. They have an App that allows you to read and purchase books through their system, which supports various platforms. It works quite well, allowing you to read your purchased books on Macs, iPhones, iPads, etc. Amazon spends money marketing their book store and this capability.

Your argument is that Apple didn’t make any money? Sure they did. They sold me that fantastic gadget that let me do this. I bought an iPhone because I could read all these great books from Amazon, as well as do all the cool things that I can do with an iPhone. That’s how Apple made their money.

As an aside, I’m reminded of the typical iPhone-zealot talking about Android. “Google hasn’t made any money off of Android because they give it away! Apple makes money from selling their phones!” Of course, Google gives away the software and makes money selling advertisements. Now Apple is trying to not only make money selling devices, but they’re also making money selling access to you.

There’s the meme running around, “If the service is free, you are the product.” The implication is that whoever runs the service sells your information. Apple is doing things a bit differently. Apple is selling access to you. Want to advertise to our customers? Pay us money and use iAds. No you can’t use some other firm, we’re making sure our developers only use us. Want to sell software? You must go through our store. Want to sell books or other digital content that you host? We want our cut.

To draw an analogy, suppose I want to sell shoes in a town. Suppose the mayor of the town says, “I’d love it if you sold your shoes in my town. But in order to get them into my town, you have to rent my trucks to bring them in. Otherwise, I’ll see to it that you don’t sell a thing in my town.” Sounds like something Boss Hogg would say in an episode of the Dukes of Hazzard, huh? But that’s essentially what Apple is saying. “You want to sell your books to our customers? No problem. You just have to use our store and we’ll take our 30% cut because of the bandwidth and all.”

Your argument is that Apple deserves it’s 30% cut because they’re providing bandwidth and hosting and all that stuff. Yet the only way you can get to Apple’s customers is to use Apple’s services. If you want to pay your own bandwidth bill and host it yourself, too bad.

I am not sure that I understand this piece. I pick up disparate threads, and I am not sure I get the ‘take home’ message. Perhaps this is just a function of my sleep deprivation. It seems to suggest that Apple should conduct its business in a manner so as not to make new enemies. I’m sure that’s not the point, but if it were, I would prefer market forces; let the market decide where you succeed or fail. I would only counsel not to be frenetic but focused, purposeful and not to pursue any line unless it fits within your strategic plan, and can be supported by your business model. As for enemies, if you succeed, you can count on making more of these. Perhaps you will revisit this topic again, and it will be clearer to me.

To draw an analogy, suppose I want to sell shoes in a town.? Suppose the mayor of the town says, ?I?d love it if you sold your shoes in my town.? But in order to get them into my town, you have to rent my trucks to bring them in.? Otherwise, I?ll see to it that you don?t sell a thing in my town.?? Sounds like something Boss Hogg would say in an episode of the Dukes of Hazzard, huh?? But that?s essentially what Apple is saying

Peter, I think I see the point you are trying to make, however, where the analogy fails, in my opinion, is that a town, by definition, belongs to everyone. No one has the right to impose their own rules on anyone, and anyone doing so is a thug, private, public or otherwise. I’ve never watched the TV show to which you refer, but Boss Hogg sounds like a thug. Apple owns its business, including its online music store and bookstore.

I am no lawyer, although Nemo is, and from what I can tell, a very smart one; but it seems to me that Apple has the right to be the gatekeeper to its own business. Using your shoe analogy, this would be akin to Footlocker granting shelf space to Bata shoes, so that Bata can have access to Footlocker’s customers - at no cost. Footlocker could have only one question for Bata - Why? If a business is not willing to do the hard work of creating a client base and and an outlet through which to reach them, how can they object to another company charging for access to theirs?

I admit, however, that the gist of this discussion eludes me. It seems to be that some people liked Apple better when it was like a small mammal scurrying at the feet of dinosaurs. Now that it is the size of King Kong, we want it caged. Me, I’m on the side of the Kong; kick butt and don’t apologise. Off to find a bed with a mosquito net. Cheers.

wab95: It’s great that you picked up disparate threads. There ARE disparate threads. I am neither 100 % fan boy nor dedicated, abusive critic. All complex issues have disparate threads. I pick them out, roll them around in my head, and try to get us all thinking about what’s important to us.

Some readers prefer either a consistent rage and snark or else acolyte devotion. You won’t find that from me.

wab95: It?s great that you picked up disparate threads.? There ARE disparate threads.? I am neither 100 % fan boy nor dedicated, abusive critic.? All complex issues have disparate threads.? I pick them out, roll them around in my head, and try to get us all thinking about what?s important to us.

Some readers prefer either a consistent rage and snark or else acolyte devotion.? You won?t find that from me.

John,

Thanks for confirming that I wasn’t just being too bloody thick to follow your train of thought. Your putting forward balanced, thought-provoking ideas is what many of us have come to expect and rely on. Thank you, sir.

I love the Star Trek TOS reference above. I think TOS is enjoying a bit of a resurrection in interest owing from the success of the movie prequel. TOS had a great deal of thought-provoking social and psychological commentary. Good stuff.

I also really liked the airforce ‘enemy’ anecdote; whether true or not, it harbours real truth about the nuance of competition, and understanding the terrain of battle.

Keep on challenging us.

Peter11:28 PM EST, Feb. 7th, 2011Guest

Using your shoe analogy, this would be akin to Footlocker granting shelf space to Bata shoes, so that Bata can have access to Footlocker?s customers - at no cost. Footlocker could have only one question for Bata - Why? If a business is not willing to do the hard work of creating a client base and and an outlet through which to reach them, how can they object to another company charging for access to theirs?

Never heard of Bata, but from what I understand, they are a shoe retailer AND a shoe manufacturer. You’re 100% from the manufacturer point-of-view. If I make shoes and I want to sell them in Footlocker, I have no problem with the idea that I have to pay Footlocker to carry them (assuming all the profit goes to me). Most businesses will use a “wholesale” model meaning that Footlocker pays less for my shoes and turns around and sells them for me. The iTunes Stores use an “agent” model, where Apple acts as an agent and takes 30%. But, in any event, all that is perfectly fine.

The problem is that is not what’s happening here.

The correct analogy would be Footlocker and The Finish Line. Both Footlocker and The Finish Line sell athletic shoes from Nike, Reebok, Adidas, and Asics.

Imagine the mythical mall. Apple has a bookstore over here. Amazon has a giant bookstore over there. Sony has a little tiny bookstore upstairs, on the left, behind the potted plants. They all sell books. In some cases, they sell the same books. However, if I walk into the Amazon bookstore and buy a book, Apple gets 30%.

Why?

Because Apple not only owns the bookstore, Apple also owns the mall. If Amazon wants to be in that mall, they have to pay Apple 30% of every book that they sell. Don’t like it? Then you can’t be in our mall.

Where does this end? Apple owns a video store where they rent videos. Should Netflix pay Apple 30%? Apple owns a music store—will they start charging Napster 30%?

I’m an old Mac Guy. I remember the good ol’ days when Apple wrote the operating system, built the computers, and left it to third-parties to develop applications. Now, Apple is competing against their third-party developers and that’s bad enough. To add insult to injury, they’re now insisting that their competitors pay them for the privilege of competing against them.

An an aside, you’ve never seen The Dukes of Hazzard? Damn, I’m old. It’s where the term “Daisy Dukes” comes from.

Because Apple not only owns the bookstore, Apple also owns the mall.? If Amazon wants to be in that mall, they have to pay Apple 30% of every book that they sell.? Don?t like it?? Then you can?t be in our mall.

Where does this end?? Apple owns a video store where they rent videos.? Should Netflix pay Apple 30%?? Apple owns a music store?will they start charging Napster 30%?

Thanks for following up, Peter. My earlier reply was meant to solicit clarification, which you have provided. You and John appear to be making similar points. I will have to cogitate a bit more before I come to any real opinions, but at a visceral level, and as an unabashed capitalist and entrepreneur, I have yet to find offence. Your point, however, is well taken; where does it end? In my view, it ends where the market - and your clients - begin to punish you by voting with their wallets.

An an aside, you?ve never seen The Dukes of Hazzard?? Damn, I?m old.? It?s where the term ?Daisy Dukes? comes from.